The Business World: The high price of a changing job market

If people don't understand the incentives how can they be effective?

ARE YOU paid enough? Most people would probably say, "No", and may or may not be right. Now try another question. Do you know how your pay is determined? Most people would probably say, "Yes", and they would be wrong.

Whether or not people think they are paid enough is subjective, but they certainly cannot make a rational judgement on that if they don't understand how company reward systems are constructed.

Apparently they don't. A survey by Towers Perrin of large companies in Europe suggests only 4 per cent reckoned their staff had a good understanding of even how their basic pay was set - and that is before you get into the more complicated things, such as incentives. If people don't understand how incentives work it is unlikely such schemes will be effective.

If it is shocking it should at least be unsurprising. Another finding of this survey is that only 7 per cent of companies consult employees before introducing an incentive plan. If firms don't ask people what they want, they should not be too surprised if the staff don't understand the scheme the company devised.

Towers Perrin is a human resources consultancy and part of its business is helping companies develop their reward systems. I suppose you could say this sort of conclusion plays to their strengths: incomprehensible, badly-designed pay systems are just the things the firm is paid to sort out.

But its gloomy findings fit with most peoples' experience, that pay systems are arbitrary and wasteful. Companies do need help in implementing new reward systems and in devising them.

But at the risk of seeming Luddite, I found myself wondering whether companies would be better listening to the market and watching its signals, rather than trying to develop complicated reward systems - and whether the new communications technologies would make it easier for them to do so. The proposition is this. At present, large companies operate more or less hierarchical systems for determining pay, in the sense that assessment of how people perform plays a large part in most reward schemes.

These are tempered by the incentive and bonus schemes, but essentially the setting of pay is a bureaucratic procedure.

The market approach is different. You simply look at what you need to pay to get a job done. If good people keep leaving, you pay more. If you find you have too many good applicants for jobs, you pay less.

The choice of how people take their pay - the balance they want between basic pay, the various bonuses and other benefits such as share options - is an important but ultimately a secondary issue. The market will determine whether you are paying the right amount or the wrong one. It has been very difficult to know whether a company is paying the right rate or the wrong one, because the information is disorganised and partial. It is equally difficult for employees to know, for the same reason. Now, at last, the potential of the Internet can be harnessed to make the labour market adjust more effectively.

The hardware exists to tell employers whether they are paying the wrong rate, and to tell would-be employees not only where their skills would be best rewarded, but also what skills they should try to acquire if they want to be better paid.

Trouble is, the software is still weak. The Net can develop a market for airline seats, making sure otherwise unsold seats are not wasted by matching last-minute flyers to last-minute availability. But it has yet to develop a market for unsold jobs (so to speak) by matching skills to slots.

What can companies do about this? There is no magic wand, but they can do three things now.

First, they can use an intranet to improve their internal market in jobs. That does not mean putting how much everyone is paid on the screen. It does mean putting a fair amount of management information about staff planning into the public domain. Most companies will feel uncomfortable about that, for obvious reasons, but only by being open about excesses and shortages in the company's internal labour market can the management hope to fine- tune supply and demand for labour.

Second, they can encourage employees to comment on the effectiveness not just of reward structures, but of the perceived skill gaps they see in their organisation. The aim would be to make reward systems more of a bottom-up process, so they align more closely with the market for skills.

And third, they should use the Net for recruitment. They would say they do. But there is a wealth of difference between having a website that tells graduates it is wonderful company to work for, and one that is open about its real skill needs and what it is prepared to do to meet these.

Indeed, the act of putting on a web site the skill needs and reward systems of a company should itself be a useful discipline in thinking through how it runs its human resources side. And employees? Well, note that an increasing proportion of the workforce are not employees, but run their own businesses, contracting services to larger companies.

This will surge in the coming years and make the reward system for companies much more market-sensitive. Why pay an expensive executive when you can get the job done more cheaply on contract by a small company?

But even now, without leaving the corporate fold, employees can use the Net to discover more about skill shortages and the rewards available for those skills. The better employees become at learning what options they have elsewhere, the more effective company incentive schemes will become.

The more efficient the market for human talent, the less companies will need to rely on complex top-down reward systems.